THE FED'S HIGH-WIRE "TIGHT ROPE WALK - EXPECT IT TO BE SCARY!
- Credit potentially will contract, possibly driving the US into a recession or worse.
PROBLEMS WITH FED NOT TIGHTENING:
- A destabilizing asset price bubble could possibly get out of control (near if not there now) which would wreck the banking sector (once again!)
FED POLICY SHIFT ANNOUNCEMENT - QUANTITATIVE TIGHTENING (QT)
- Fed will reverse Quantitative Easing 'later this year',
- Schedule suggests a $1T balance sheet shrinkage (~22%) by YE 2019.
This radical removal of Liquidity from the financial markets would very likely cause:
- Interest Rates to Rise Sharply,
- Credit to contract,
- Asset Prices to Crash,
- Economy to enter a severe Recession (or worse)
WHY WOULD THE FED REALLY NEED TO DO THIS
- Preparation of some buffer for the next Recession, which is now over die historically,
- Front run a new Trump appointed Fed Chairperson ho may be forced politically to avoid QT,
- Stop current asset price bubble from setting off a systemic financial crisis.
Credit growth is too weak even though asset prices are very high